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On the Friedman Rule with Labor Market Frictions

Author

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  • Francesco Zanetti

Abstract

This paper uses a cash-in-advance model to study whether the optimality of a nominal interest rate equal to zero holds in the presence of labor market frictions. Results show that labor market frictions may break the equality between the marginal rate of substitution and the marginal rate of transformation, thereby inducing households to supply a suboptimal amount of labor. A non-zero nominal interest rate may correct the inefficient labor market decisions and improve efficiency. Numerical evaluations of the model quantify the inefficiencies generated by labor market frictions. Finally, the paper shows that an appropriate fiscal policy stance may restore the optimality of a nominal interest rate equal to zero.

Suggested Citation

  • Francesco Zanetti, 2013. "On the Friedman Rule with Labor Market Frictions," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 13(2), pages 59-78.
    • Handle: RePEc:tcb:cebare:v:13:y:2013:i:2:p:59-78
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    File URL: http://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Central+Bank+Review/2013/Volume+13-2/
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    Citations

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    Cited by:

    1. Andrea Ricci & Robert Waldmann, 2015. "Firm financed training and pareto improving firing taxes," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 32(2), pages 201-220, August.

    More about this item

    Keywords

    Labor markets; Friedman rule;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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